Analytical Pricing of European Bond Options within One-Factor Quadratic Term Structure Models

Grégoire Leblon and Franck Moraux ()
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Grégoire Leblon: CREM - Centre de recherche en économie et management - UNICAEN - Université de Caen Normandie - NU - Normandie Université - UR - Université de Rennes - CNRS - Centre National de la Recherche Scientifique

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Abstract: Jamshidian developed a model for pricing bond options within a Vasicek one-factor framework, with the very useful property that it allows an option on a coupon bond to be decomposed into a set of options on the individual coupons. In the Vasicek framework, the "Jamshidian trick" produces yields to maturity on the coupons that are linear functions of the underlying state variable. But it has not been clear whether this approach could extend to more complicated interest rate processes. In this article, Leblon and Moraux show how to extend the Jamshidian technique to quadratic interest rate processes and use it to derive analytic formulas for European call options on coupon bonds. Finally, they verify that the required conditions appear to hold in the real world.

Keywords: bond; option (search for similar items in EconPapers)
Date: 2017
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Published in Journal of Derivatives, 2017, 24 (3), pp.29 - 41. ⟨10.3905/jod.2017.24.3.029⟩

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Working Paper: Analytical pricing of european bond options within one-factor quadratic term structure models (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01525388

DOI: 10.3905/jod.2017.24.3.029

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